Keystone’s Impact on Venezuela Muted by Waning Imports

By Brian Wingfield -
Aug 26, 2013

It’s an article of faith among supporters of the proposed Keystone XL pipeline: approving the project would allow the U.S. to use more crude from Canada and less from Venezuela and other unfriendly regimes.

The reality, according to analysts and others who watch global energy trends, is more complex. U.S. imports of crude from Venezuela have been falling for decades, though TransCanada Corp. (TRP)’s proposed pipeline may hasten the trend.

Moreover, the refineries in Texas and Louisiana that would process Keystone’s oil have expanded their capacity and may simply absorb the additional stock to feed markets here and abroad for fuel, especially diesel that is in high demand in Brazil and other Latin American countries.

“The jury’s still out” on the effect increased North American production will have on the U.S.’s non-Canadian suppliers, said Ian Goodman, president of The Goodman Group Ltd., a Berkeley, California-based energy consultant.

The U.S. last year imported an average of 906,000 barrels of crude per day from Venezuela, a 35 percent decline from a four-decade high in 1997, according to the Energy Information Administration, the U.S. Energy Department’s statistical arm.

The U.S. imported 2.4 million barrels per day of Canadian crude last year, a 1,368 percent increase from the low of 164,000 barrels per day in 1981. Imports from Mexico and Saudi Arabia are down from levels a decade ago, due in part to a boom in U.S. production from formations such as the Bakken formation in the upper Midwest. At the same time, production from Venezuela has fallen.

Testy Relations

The Keystone pipeline could ship as much as 830,000 barrels a day from Canada and the Midwest, according to TransCanada. The Calgary-based company estimates that the project would reduce U.S. dependence on oil from Middle East producers and Venezuela, which has had a testy relationship with the U.S. and in 2010 revoked the visa of its ambassador during the presidency of the late Hugo Chavez.

“The idea that the Venezuelans and the Mexicans will pack up and go home when the Canadians come in is completely false,” Lorne Stockman, research director of Oil Change International, an anti-Keystone research and advocacy group, said in an interview. “This is not going to replace Venezuelan oil, it’s going to compete with Venezuelan oil.”

For supporters of the pipeline, more Canadian stock means less from others, including some nations of the Organization of the Petroleum Exporting Countries: Algeria, Angola, Ecuador, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.

Biggest Source

“Do you want heavy oil from Canada and light oil from the Bakken region of the United States, or do you want to import oil from Venezuela and other OPEC nations to feed those refineries?” Russ Girling, TransCanada’s chief executive officer, said on a July 26 conference call with reporters.

The U.S. imports about 40 percent of the crude to feed domestic fuel demand, according to the EIA. Canada is the biggest source, providing about 28 percent, followed by Saudi Arabia, Mexico, Venezuela and Russia.

“Canadian supply will always displace the seaborne crude when push comes to shove” because it is cheaper to transport by pipeline, Rob Smith, senior manager at PFC Energy in Washington, said in a phone interview.

“If the market is strong internationally, they may decide, ‘I want to make higher margins elsewhere,’” he said in a phone interview. If it’s weak, those suppliers may continue to be active in the U.S. market, he said.

Oil Exports

Goodman said he expects the increase in North American supply to add pressure for U.S. crude exports, which have been limited since the 1973-74 Arab oil embargo.

Canada is also looking to sell its oil abroad.

“Considering the scale of growth, expected price discounts for crude oil in North America, and uncertainty surrounding the timing of future pipelines, Canada needs options,” analysts from the consulting firm IHS CERA wrote in a January report. They identified China -- which is planning to add 2.7 million barrels per day of refining capacity by 2016 -- as well as Korea and Japan among potential markets for crude from Canada’s oil sands.

U.S. Gulf Coast refineries will need Canadian crude to keep running as refining capacity in Asia increases, Jackie Forrest, IHS CERA’s senior director for North American oil research, said in a phone interview.

Fuel Exports

The National Wildlife Federation, which opposes the pipeline, has said it believes much of the Keystone oil and the fuel refined from it will be exported from the Gulf Coast. Stockman, of Oil Change International, said Gulf Coast refineries are already exporting much of their refined products.

Some of the fuel made from the Canadian oil would find ready markets in Brazil or Mexico, where demand for diesel in particular has surged. Francisco Sanchez, the U.S. Commerce Department’s under secretary for international trade, is now visiting Brazil and Uruguay to discuss issues including expanding U.S. oil and gas exports.

Supporters say those refineries are already serving foreign buyers and there is an advantage for U.S. consumers to have refineries well-fed.

“If you don’t export, then these refineries can’t run to the capacity that they’re designed to,” Charles Drevna, president of the American Fuel & Petrochemical Manufacturers, a Washington-based industry group.

Market Forces

The State Department, which is reviewing the Keystone project because it would cross an international border, has said the ultimate destinations for the gasoline and diesel fuel produced from the crude “would be determined by future market forces,” according to its draft environmental review released in March. President Barack Obama may make a final decision on the Keystone pipeline in the coming months.

Venezuela's oil minister, Rafael Ramirez, said the Keystone pipeline project was backed by "political lobbying" in the U.S. that depicts Venezuela as the enemy.

Ramirez who also serves as the president of state oil company Petroleos de Venezuela, told reporters during an event to mark the anniversary of a refinery explosion: ``The U.S. government is using Venezuela as part of an internal argument aimed at displacing our market share instead of concentrating on the environmental issues related to the pipeline.''

Refineries Expanding

In 2011, the U.S. for the first time since 1949 became a net exporter of refined petroleum products, such as gasoline and diesel, according to the EIA. The agency said foreign demand for distillate, which includes diesel fuel was the primary reason.

Refiners can produce diesel and gasoline from either heavy crude, such as that from Canada and Venezuela, or light crude from the U.S.

Refiners including Motiva Enterprises LLC are expanding capacity to be able to handle increased flows of heavy and light crude. U.S. Gulf Coast refineries at the beginning of the year had the capacity to process about 8 million barrels of crude a day, according to the EIA. U.S. refining capacity in general has increased about 2 percent annually since 2007, according to the agency.

Houston-based Motiva in May 2012 opened a 325,000 barrel-a-day crude unit in Port Arthur, Texas, doubling the plant’s capacity and making it the largest refinery in the U.S., capable of processing 600,000 barrels of crude a day.

Motiva's Facility

The expansion allows the refinery to process a variety of types of crude oil, according to Destin Singleton, a spokeswoman for Houston-based Motiva, which is a joint venture of subsidiaries of Saudi Arabian Oil Co. and Royal Dutch Shell Plc. (RDSA) While refinery’s expansion isn’t dependent on completion of the Keystone pipeline, the company expects an increase of heavy, sour crudes, she said in an e-mail.

Valero Energy Corp. (VLO), the world’s largest independent refiner, expects distillate yields from refining to grow to 41 percent in 2015, up from 33 percent in 2010 -- meaning that the San Antonio-based company will be producing almost as much diesel as gasoline -- according to a May 21 filing with U.S. regulators. The company within the past nine months has installed devices at Louisiana and Texas refineries to boost yields.

Marathon Petroleum Corp. (MPC) increased its exports of refined products by about 226 percent, to 114,000 barrels per day from 2010 to 2012, according to Sid Barth, a spokesman for the Findlay, Ohio-based company, which has a refinery about 45 miles (72 kilometers) southeast of Houston. “Most of this has been diesel,” he said in an e-mail.

The increase in crude supply on the Gulf Coast is “very good for refiners,” Goodman said. “I don’t think it’s really going to affect pricing for consumers” because prices for refined goods are set by global markets, he said.